Merger mania makes a comeback

Jul. 29, 2013
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Artist's depiction of neutron star collision. / Dana Berry

by Matt Krantz, USA TODAY

by Matt Krantz, USA TODAY

Wall Street is finally thinking big again. A flurry of merger activity Monday shows the megamerger is back, and more companies are starting to get traded like so many baseball cards.

A potent cocktail of surging corporate cash piles and companies hungry for growth is fueling an uptick in merger-and-acquisition activity. Some wonder if conditions are ripe to kick off an M&A wave rivaling that of the late 1980s, when Michael Douglas' Gordon Gekko character in Wall Street symbolized merger mania. The question is whether these deals might cause problems for the economy, such as higher prices or a wave of layoffs, as they did three decades ago.

"The comeback in M&A activity in the U.S., the one we've all been waiting for since the financial crisis, has finally come," says Amanda Levin of market research firm Mergermarket. "It's time. It had to happen."

The trend of companies putting themselves up for sale is likely to grow as the bull market continues to snort. With the easy profits of the recovery becoming harder to come by, companies have to get more creative to find areas to grow.

The landscape features:

â?¢ Marquee deals. Monday brought a cluster of major merger activity, including the $2.6 billion buyout of department store Saks by Canadian retailing giant Hudson's Bay; U.S. drug maker Perrigo buying biotech firm Elan in an $8.4 billion deal; and broadcaster Sinclair buying Allbritton TV stations in a nearly $1 billion transaction, another milestone in the rampant concentration of local TV stations.

Also Monday, IMS, a provider of professional services, bought Michael Baker, which provides engineering and construction services, in a roughly $400 million deal, a 37% premium on the Friday stock price. These developments came a day after the announcement that advertising powerhouses Omnicom and Publicis would team up in a $35 billion deal that would create the world's largest ad agency.

â?¢ Big-ticket items. So far this year, U.S. companies have been targeted in 5,537 deals worth $594.7 billion, market tracking firm Dealogic says. The dollar value of deals has jumped 24% from the same point in 2012.

But much of the explosion has been due to megadeals, shown by the fact that the number of mergers is relatively flat, says Richard Peterson of S&P Capital IQ. Big deals this year include PC maker Dell's proposed $28 billion buyout and the $28 billion acquisition of condiment conglomerate Heinz by a group including Warren Buffett's Berkshire Hathaway. There have also been airline industry consolidation and a Chinese firm's effort to buy Virginia-based Smithfield Foods.

â?¢ It's an American thing. Companies aren't being snapped up elsewhere as they are in the U.S., Mergermarket's Levin says. Firms based in the U.S. are seen as being the most attractive targets, and the economy is healthier here, she says. More than a third of this year's deals, slightly higher than last year, cross international borders, according to Mergermarket.

With U.S. companies sitting atop record levels of cash, it's likely more outfits with interesting technologies are in the sights of suitors, Peterson says. The strong dollar has Canadian buyers heavily targeting U.S. firms. Our neighbor to the north has been involved in a quarter of the year's deal activity on a dollar basis, higher than usual, Peterson says.

All told, S&P Capital IQ expects $1 trillion in buyout activity this year, the busiest year since 2007, during the last bull market. Merger activity has failed to pierce the $1 trillion mark in any of the past five years, Peterson says. It came close in 2012, when the value of deals totaled $940 billion.

But investors shouldn't assume the buyout binge will be the fuel to keep the stock market surge rolling, says Robert Maltbie of asset management firm Millennium Asset Management. The movement of individual investors back into stocks and bonds could be more meaningful. "M&A is not the driver," he says. "The new drivers are individual investors."